50% Relief Above the Allowance Means a Real IHT Bill

If you own a family business worth more than a couple of million pounds, the inheritance tax rules that took effect for deaths from April 2026 change the answer you were probably given years ago. Business relief used to take a genuine trading company out of inheritance tax almost entirely. From 6 April 2026 it does not. Above a new allowance, the relief halves rather than disappears — and half of a large number is still a large number. An ordinary trading company can now leave its family a real, payable tax bill.

This is the part the reassuring headline misses. "Business relief still exists" is true. So is "your family will still owe inheritance tax on the business", and both can be true at once, because the relief above the allowance is now 50% rather than 100%. For a company worth three million pounds, that is not a rounding error. It is a bill measured in hundreds of thousands, falling due on a business nobody can spend.

Here we work the arithmetic on the size of firm this actually affects — a haulage company, a manufacturer, a care home worth a few million — rather than the ten-million-pound estate the big accountancy firms write for. And we are honest about how few estates ever reach this point at all.

The short answer: the relief halves, it does not vanish

For years, the standard advice to owners of trading companies was comfortable: business relief, often at 100%, meant the shares passed to the family free of inheritance tax, so there was little to plan for. That advice was broadly right under the old rules, and it is now out of date for larger businesses.

The change is simple to state. Full relief is now rationed by an allowance. Up to the allowance, qualifying business property still gets 100% relief and passes tax-free. Above the allowance, the relief drops to 50%. Nothing is taken out of the reach of the tax entirely any more; the excess is merely taxed on half its value. For a modest business the allowance may cover the whole thing and nothing changes. For a genuinely valuable trading company, the part above the allowance now carries tax that simply did not exist before.

The reason this matters so much for a business, rather than for cash or shares in listed companies, is liquidity. A trading company's value is locked inside it — in vehicles, premises, stock, contracts and goodwill — and none of that is money the family can hand to HMRC. The tax is calculated on a value nobody can spend, which is the whole difficulty of business succession in one line.

What actually changed, and from when

For deaths on or after 6 April 2026, 100% relief on qualifying agricultural and business property is limited to a combined allowance of £1 million per person. Above that allowance, relief is given at 50%. The £1 million is shared across agricultural and business property together — it is not £1 million each — and, on the government's stated position, the new allowance is not transferable between spouses in the way the ordinary nil-rate band is.

The headline inheritance tax rate remains 40%, charged on the value in the estate that is not covered by relief or by an allowance. The ordinary nil-rate band, currently £325,000, still applies to the estate as a whole, though in a business estate it is often already used up by the house and other assets before it can touch the company.

Source: HM Treasury, Autumn Budget 2024, and the government's summary of reforms to agricultural property relief and business property relief, gov.uk, published under the Open Government Licence v3.0.

Two qualifications matter before anyone panics or relaxes. First, the property still has to qualify for relief at all — broadly, a genuine trading business owned for the required period, not an investment company or a business sitting mainly on surplus cash. Second, these figures describe the position for deaths from 6 April 2026 onward; a death before that date is under the old rules. If your business is close to the line, this is a moving target and worth a proper review with the estate's advisers.

The arithmetic, worked on a £3 million firm

Take a haulage business worth £3 million, owned by one person, all of it qualifying business property. Assume, for the illustration, that the owner dies after 6 April 2026 and the shares do not simply pass to a spouse. The sum runs like this:

• The first £1 million is covered by the allowance and gets 100% relief. Taxable value from this slice: nil.
• The remaining £2 million gets 50% relief. That leaves £1 million of taxable value brought into the estate.
• That £1 million is charged at the 40% inheritance tax rate, producing about £400,000 of tax — an effective 20% on the £2 million above the allowance.

Source: inheritance tax rate of 40% and the £325,000 nil-rate band, HM Revenue & Customs, How Inheritance Tax works: thresholds, rules and allowances, gov.uk. The pound figures above are an illustration calculated from those published rates, not a quoted statistic.

The exact figure will shift with the specifics — any unused nil-rate band, other assets in the estate, the residence nil-rate band, and whether some of the shares pass to a spouse. But the shape does not change: a three-million-pound trading company, which a decade ago would have passed with no inheritance tax at all, now carries a bill in the region of a few hundred thousand pounds. That is the "real IHT bill" the reform creates, and it lands on a family who own a company, not a pile of cash.

Why it catches ordinary trading companies

The instinct is to assume this is a problem for the very wealthy. It is not, and that is the point of working the numbers on a haulage firm rather than a landed estate. A single depot, a fleet of lorries, a maintenance contract book and a few years of retained profit can put a perfectly ordinary regional business well above the £1 million allowance. The same is true of a small manufacturer with a factory, or a care home with a building. These are not fortunes; they are businesses, and their owners rarely think of themselves as rich.

It is worth being equally honest in the other direction. The great majority of estates never come near inheritance tax at all — most people die with an estate below the thresholds, and only a small minority of estates pay any inheritance tax in a given year. Business owners with a genuinely valuable trading company are a subset of that minority. So this is not a warning aimed at everyone; it is aimed squarely at the family whose main asset is a company worth a few million, which is exactly the group that used to be told there was nothing to plan for.

Source: HM Revenue & Customs, Inheritance Tax statistics, which report the proportion of UK deaths each year resulting in an inheritance tax charge, gov.uk.

The spouse trap: the bill often waits for the second death

There is one feature of the rules that both softens the blow and hides it. Transfers between spouses and civil partners are generally exempt from inheritance tax. So if the whole business passes to a surviving husband or wife, there is usually no inheritance tax on the first death — the relief cap does not bite, because the spouse exemption carries the shares across untaxed.

That sounds like a reprieve, and in the short term it is. But it can quietly defer the problem to the second death, when the business passes to the children and there is no spouse exemption left to lean on. Because the new £1 million allowance does not transfer between spouses, the family cannot simply double it up on the second death the way they can with the nil-rate band. The result is that a couple who felt entirely safe when the first of them died can leave their children the full bill when the second dies. Planning that looks at only the first death misses this entirely.

Paying it: ten yearly instalments and the cash problem

Recognising that business assets are illiquid, the law allows some of the tax to be spread. Inheritance tax attributable to shares in an unquoted trading company can generally be paid in ten equal annual instalments rather than in one lump sum, which is a genuine help when there is no cash to hand.

Source: HM Revenue & Customs, Pay your Inheritance Tax bill: pay in yearly instalments, gov.uk.

The instalment route has limits worth knowing. Interest may be charged on the outstanding balance, so spreading the cost is not free. The option can be withdrawn if the business is sold, which can force the whole remaining balance to fall due at once. And even ten years of instalments have to be found from somewhere — usually from the profits of the very business the family is trying to keep, in the years when it is most fragile because its owner has just died. The same timing problem, where a tax bill arrives before an asset can be turned into cash, catches families with inherited houses too: we set it out in the inheritance tax bill that lands before the house can be sold, and the instalment mechanics in paying inheritance tax in ten yearly instalments. Miss the deadlines and the position hardens quickly, as we describe in what HMRC does when the tax is not paid by month seven.

What families can do before it happens

The reason this topic sits on a life insurance site is that a valuable business with an inheritance tax bill attached is one of the classic reasons families arrange cover written in trust. A policy sized to the expected tax, held in trust so it pays outside the estate, gives the family a pot of cash at exactly the moment the tax falls due — which is the one thing a trading company cannot provide on its own. Used well, it is the difference between keeping the business and selling it to pay the tax on it.

None of this is a personal recommendation, and the right structure depends entirely on the numbers and the family. But the general point holds: the tax is now real, it is payable, and it arrives when there is least cash to meet it. Working out the likely size of the bill, and whether cover in trust should stand behind it, is a conversation to have while the owner is alive and well. You can get life insurance quotes and ask an FCA-authorised broker to size the cover against the business's value, and it is worth reading how much cover a small company actually needs alongside it, since the tax bill is only one of the losses a death exposes. The wider scramble in the days after an owner dies is set out in the first two weeks after a company owner dies.

Scotland and Northern Ireland

Inheritance tax is a UK-wide tax administered by HM Revenue & Customs, so the £1 million allowance, the 50% relief above it, the 40% rate and the instalment option all apply the same way in Scotland and Northern Ireland as in England and Wales. There is no separate Scottish or Northern Irish rate or relief to layer on top.

What differs, as ever, is the machinery for administering the estate around the tax. In Scotland the personal representatives obtain confirmation rather than a grant of probate, and in Northern Ireland probate is handled through its own office, but in each case the inheritance tax due on the business is calculated under the same UK rules. A family in Glasgow or Belfast with a three-million-pound trading company faces the same bill, and the same liquidity problem, as one in Manchester.

Frequently asked questions

How much business relief can be claimed from April 2026?

For deaths on or after 6 April 2026, full relief on qualifying agricultural and business property is limited to a £1 million allowance per person, with relief given at 50% on value above it. The allowance covers agricultural and business property combined, not one allowance each, and the government's position is that this new allowance does not pass to a surviving spouse in the way the ordinary nil-rate band does.

What does 50 per cent relief actually cost a family?

It halves the taxable value rather than removing it. Qualifying business property above the allowance is charged at the 40% inheritance tax rate on half its value, which works out at an effective 20% of the excess. On a business worth several million pounds, that is a real and payable bill — on a £3 million trading company, in the region of £400,000, depending on the other assets and allowances in the estate.

Can the tax be paid over time?

Inheritance tax attributable to shares in an unquoted trading company can generally be paid in ten equal annual instalments, which spreads the cost without removing it. Interest may be charged on the outstanding balance, and the instalment option can be withdrawn if the business is sold, bringing the remaining tax due at once. Check the exact position with the estate's advisers, because the detail turns on the type of asset and how it is held.